An Interview with Cloud Consultancy CEO Jon Hallett

One of the interesting topics for technology consultancies over the next few years will be how best to navigate operationally as cloud computing continues to take hold. The move to the cloud has ramifications in numerous areas, including evolving client demand profiles and shifting software vendor leadership. Atlanta-based consultancy Cloud Sherpas is on the edge of several of these fronts, with a pure-play focus on the cloud and a significant partnership with Google, one of the players best positioned to challenge the traditional application vendors. The firm has raised nearly $3 million in private equity funding within the last year, including a $1.6m round on November 3, and is the number one provider of managed Google Apps Solutions in the US, with over 200 implementations moving over 600,000 enterprise users to Google Apps.

The firm is run by CEO Jon Hallett, an industry veteran who started his career at Accenture before stints as CEO of change consultancy NMP, President of e-business consultancy AppNet Systems, Executive Vice President/Director of managed services provider MindSHIFT Technologies and Chairman of Microsoft consultancy Northridge. I sat down with Jon to learn more about Cloud Sherpas and to get his perspective on a number of issues.

Randy Grigg: When and how did you get into the consulting business?

Jon Hallett: I started my consulting career in 1991 at what is now Accenture. Although I studied engineering, when I was looking at opportunities coming out of school there were a few things that I found attractive about the consulting jobs. Most notably, consulting seemed to provide the greatest exposure in the shortest period of time to the widest variety of challenges.

RG: What’s the founding story behind Cloud Sherpas and how did you come to be involved?

JH: Cloud Sherpas was started several years ago during the early push to cloud computing. Our founder, Michael Cohn, felt that the business benefits of cloud computing would become increasingly obvious and took the courageous step of leaving his job and seeding the company to get it started. He subsequently pulled in several others and the company was launched with the goal of helping large enterprises move to cloud-based solutions. I became involved about a year ago as the company looked to accelerate and capitalize on its early success.

RG: What was the genesis of the Google relationship?

JH: Cloud-based solutions should be scalable, secure, flexible, powerful, and massively cost-effective. When considering those factors, Google is the clear leader, and consequently Google has always been central to the company’s strategy and marketplace offerings. In almost all cases, Google technology — AppEngine, Apps, Enterprise Search, etc. — serves as the foundation technology that drives performance and value for our clients.

RG: Tell us about your experience raising capital recently. Why did you decide to raise the money, when did you start the process and how did you find general market receptivity to equity investment in the sector?

JH: The reasoning on a capital raise was simply adding a base level of working capital to accelerate hiring across several fronts. We set out to raise the round in August and had the target amount over-committed within several weeks and closed in early October. Obviously, this is atypical, but I think our investor discussions were a little unique in that i) we were growing very quickly; ii) we were profitable and therefore could negotiate from a reasonable vantage point; iii) we had the benefit of having a team on board that had successfully returned capital to equity investors in the past. That said, this type of investment was not for every class of venture investor. Those seeking pure IP plays did not find our go-to-market “disruptive enough”, and that was certainly okay for us. Strong cloud-based solution providers such as Cloud Sherpas are most appealing to investors looking to make a solid return with very little downside risk versus those only looking to hit grand slams but are willing to accept a few strike-outs along the way. Our investor message has centered around disciplined, market-leading growth with a heavy emphasis on execution, execution, execution.

RG: What are the major differences from an operating perspective in a consultancy focused on cloud-based software vs. more traditional on-premise software?

JH: There are several key differences.

First, the opportunity for providing a “managed solution” is much greater in the cloud-based realm. Typical consulting firms working through on-premise solutions see greater peaks and valleys in their services revenue due to the start and stop of various client engagements. In the cloud world, there exists a more logical approach for creating a comprehensive customer relationship by playing a greater role in the on-going management of solutions. The main consulting phases are i) design and implement the cloud migration strategy; ii) build new solutions that take advantage of a cloud-based infrastructure; and iii) manage and evolve the client’s use of cloud-hosted solutions It is the on-going management during the third phase that gives the service provider a greater opportunity to help clients achieve maximum value from a cloud-centric solution.

Second, cloud-based solutions allow engagements to follow a more Agile, iterative path. Consequently, consulting engagements can be designed along the lines of smaller, more iterative releases, resulting in lower TCO for the client as solutions come to market faster and development and testing schedules can be broken into more manageable and less complex efforts.

RG: Many consultancies struggle with the issue of how far to go in developing proprietary IP and figuring out a workable operating model that combines traditional consulting around third party tools with product development, ownership and marketing. How do you see Cloud Sherpas evolving on this front?

JH: The opportunity for custom IP within the cloud market today is gigantic. That said, the point you bring up is a dilemma that many companies face and have a hard time navigating. We have approached this problem by creating a formal R&D and product development group that is focused on developing IP that accelerates and enhances the solutions we bring to market. Already, we have a foundational Google product called SherpaTools that is in use at over 6,000 companies around the world. This success illustrate one of the advantages of developing technology for the cloud: ease of distribution. There is no way we could have achieved that kind of distribution for an equivalent on-premise software solution for anywhere close to the same cost. That said, companies need to be watchful of both sides of this equation — the same world that lets a software provider gain market share at such an impressive pace also is available to competitors. Consequently, displacement risk remains high if product quality or value falters.

RG: What does your sweet spot client look like in terms of size and any other criteria?

JH: We look at three primary vectors when evaluating potential clients: vertical or industry, employee size and “cloud awareness”. From a vertical perspective, companies that are either in a depressed industry or a forward-thinking industry tend to be ideal. So on the one hand you may have a manufacturing industry prospect looking at cloud alternatives for cost reduction reasons and, on the other, you may have a leading technology company evaluating the cloud due to the agility and scalability benefits. From a size perspective, we tend to focus on companies that are 7,000 seats or under, although we have managed cloud migration efforts up to 60,000 end users. On the last point, “cloud awareness,” we want to work with clients that to some degree already “get it.” We believe the benefits and advantages are so numerous and obvious that if the early conversations with a prospect show a lack of buy-in to the macro concepts, then we know we have a long road ahead of us.

RG: What are the key metrics you focus on in managing your business?

JH: We of course focus on the two obvious primary P&L metrics — EBITDA and Revenue. We then track about 50 other metrics from various departments but the key ones track to 3 main categories. The first category relates to recurring revenue and within that category we look at recurring revenue as a percentage of total revenue, ARPU and recurring revenue growth. The second category relates to operating efficiency, and the key metrics include services gross margin %, sales acquisition cost, gross profit per FTE and sales win/loss %. The third category relates to Client Satisfaction. We measure this category by examining churn, revenue growth within existing accounts and, finally, a handful of metrics related to quality. As with any business, there are many more, but the above summary covers some of the top things a company like ours must focus on.

RG: Is your sales model driven by internally-generated or vendor partner-provided lead flow?

JH: Our sales model depends on both generating our own leads as well as working with partners such as Google.

RG: What was your revenue growth rate for ’10 and what are you expecting for ’11?

JH: We saw unusually high growth in 2010 with revenue coming in at 600% over 2009. Our 2011 goal is somewhat less ambitious at 300% year-over-year, but obviously that is still an aggressive growth trajectory.

RG: What’s one piece of advice you wish you’d received before running a consultancy?

JH: You live and die by your project managers.

Thanks to Jon for sharing his thoughts. While there are several firms focused on Salesforce.com implementations that have achieved good scale, Cloud Sherpas is an early leader in the cloud application consulting, non-SFDC division. It will be fascinating to see how things evolve in this space.

We’ll continue to blend these types of interviews with commentary on industry trends, operating models, M&A activity and other content (hopefully) of interest to technology consultancy executives. Please let me know your feedback and ideas for topics you’d like to see covered here.